Microeconomics Midterm 3 (11, 12, 13)

question

Technology

answer

The process a firm uses to turn inputs into outputs.

question

Positive Technological Change

answer

Ability to produce more output using the same inputs.

question

Negative Technological Change

answer

Using the same inputs → output declines.

question

Short Run

answer

The period of time in which at least one input is fixed.
- factory, store, office

question

Long Run

answer

The period of time in which a firm can vary ALL of its inputs.

question

Variable Costs

answer

Costs that changes as output changes.

question

Fixed Costs

answer

Costs that remain constant as output changes.

question

Total Cost =

answer

Fixed Cost + Variable Cost

question

Explicit Cost

answer

A cost that involves spending money.

question

Implicit Cost

answer

A non-monetary opportunity cost.
- no salary for your own company → non-monetary opportunity cost = salary you COULD'VE gotten working at another job.

question

Economic Depreciation

answer

The difference between what you pay for capital (e.g. car) at the beginning of the year and what you would receive if you sell it at the end of the year.

question

Marginal Product of Labor

answer

The additional output a firm produces as a result of hiring one more worker.

question

Law of Diminishing Returns

answer

Adding more of a variable input (e.g. labor) to same amount of fixed input (ovens), will cause the marginal product of the variable input to decline.

question

Average Product of Labor Equation

answer

The total output produced DIVIDED by the quantity of workers.
= Q/L

question

Average Product of Labor Definition

answer

Average of marginal products of labor.

question

Average Total Cost Equation

answer

= TC/Q
(Total Cost / Output)

question

Marginal Cost Definition

answer

The change in a firm's total cost from producing one more unit.

question

Marginal Cost Equation

answer

= ΔTC/ΔQ

question

Average Fixed and Variable Cost Equation

answer

AFC = FC/Q
AVC = VC/Q

question

ATC =

answer

AFC + AVC

question

When MC < ATC...

answer

ATC ↓

question

When MC > ATC...

answer

ATC ↑

question

A long run average cost curve shows...

answer

The lowest cost at which a firm is able to produce a given quantity of output.

question

Diseconomies of Scale

answer

Long run average cost increases as we increase quantity.

question

Constant Returns to Scale

answer

Long run average cost remains unchanged as we increase quantity.

question

Economies of Scale

answer

Long run average cost decreases as we increase quantity.

question

Minimum Efficient Scale

answer

The lowest level of output at which all economies of scale are exhausted.

question

Why a firm experiences economies of scale?

answer

1. Firm's Technology
2. Workers become more specialized
3. Able to purchase inputs at lower prices
4. Able to borrow money at a lower interest rate

question

Why a firm experiences diseconomies of scale?

answer

The firm gets too large to be managed effectively.

question

Market Structure

answer

How firms interact with buyers to sell their output.

question

Perfect Competition

answer

1. Many Firms
2. Identical Products
3. Very easy to enter
(wheat / poultry farming)

question

Monopolistic Competition

answer

1. Many Firms
2. Differentiated Products
3. Very easy to enter
(restaurants / clothing)

question

Oliglopoly

answer

1. Few Firms
2. Identical OR Different Products
3. NOT easy to enter
(manufacturing / cars)

question

Monopoly

answer

1. ONE firm
2. Unique Products
3. Entry Blocked
(USPS / First Class. Providing Tap Water)

question

In a perfectly competitive market the firm faces a ___________________ demand.

answer

HORIZONTAL

question

Why is the demand horizontal in a perfectly competitive market?

answer

- There are many firms
- Product is identical
→ Firm can NOT influence the price (PRICE TAKERS!!!!)

question

Profit Equation

answer

= Total Revenue - Total Cost
= TR - TC

question

Average Revenue Equation

answer

= TR / Q = (P x Q) / Q = P

question

Marginal Revenue Definition

answer

Additional revenue from selling one more unit.

question

Marginal Revenue Equation

answer

= ΔΤR / ΔQ = P

question

In a perfectly competitive market price (P) is equal to....

answer

- MR
- Average Revenue

SO

P = MR = Average Revenue

question

Rules for Profit Maximization

answer

1. Where the difference between TR and TC is largest (POSITIVE)
2. Where MC = MR
(MR = P → P = MC)

question

Equation for Profit Maximization

answer

Profit = (P - ATC) x Q

question

When P > ATC....

answer

Profits are positive

question

When P = ATC...

answer

Profits are ZERO

question

When P < ATC...

answer

Profits are NEGATIVE

question

Shut Down Condition for Perfect Competition

answer

P < AVC → Firms will NOT produce output

question

The firm's MC curve in perfect competition is its _________ curve ONLY for prices ____ or _________ AVC.

answer

1. Supply
2. At
3. Above

question

Break Even

answer

Zero Economic Profit

question

Long Run Competitive Equilibrium

answer

Firms entering/exiting the market until the firms which remain in the market break even.

question

Competition in the long run drives prices to.....

answer

P = Minimum Long Run Average Total Cost

question

Constant Cost Industry

answer

- Indicated by a horizontal supply line

question

Increasing Cost Industry

answer

- Some factors of production cannot be replicated
- Upward Sloping
e.g. wine → ↑P of land → ↑Cost

question

Decreasing Cost Industry

answer

- One firm can generate benefits for other firms
- Downward Sloping
e.g. nike shoes → synthetic rubber

question

Productive Efficiency

answer

The good is produced at the lowest possible cost.

question

Allocative Efficiency

answer

Production is in accordance w/ consumer preferences
MB = MC

question

Perfect Competition is BOTH ______________ & ________________ Efficient

answer

1. Productive
- P = MC, P = Minimum ATC
2. Allocative
- MB = MC

question

Price Effect

answer

Loss revenue due to lower prices.

question

Output Effect

answer

Gain in revenue from increase in output.

question

Each firm that has the ability to affect the price will have a __ _________ below its demand curve.

answer

- MR Curve

question

How a Monopolistic Firm Maximizes Profits in the Short Run

answer

1. MR = MC
(go up to ATC and D)

question

More firms entering in the monopolistic market =

answer

Short run positive economics profits

question

In the Long Run in a Monopolistic Market...

answer

1. Demand curve will shift to the left
2. Become MORE elastic → consumers have more substitutes

question

A Monopolistic Competition is NOT ________ & ________ Efficient

answer

1. Productive
- P DOES NOT EQUAL Min ATC
- MB (P) DOES NOT EQUAL MC

question

Excess Capacity

answer

If the firm increases its output, the firm could produce at a lower ATC.

question

Consumers benefit from...

answer

Product Differentiation

question

What makes a firm successful?

answer

1. Differentiate its product
2. Ability to produce at a lower average cost

1 of 67

question

Technology

answer

The process a firm uses to turn inputs into outputs.

question

Positive Technological Change

answer

Ability to produce more output using the same inputs.

question

Negative Technological Change

answer

Using the same inputs → output declines.

question

Short Run

answer

The period of time in which at least one input is fixed.
- factory, store, office

question

Long Run

answer

The period of time in which a firm can vary ALL of its inputs.

question

Variable Costs

answer

Costs that changes as output changes.

question

Fixed Costs

answer

Costs that remain constant as output changes.

question

Total Cost =

answer

Fixed Cost + Variable Cost

question

Explicit Cost

answer

A cost that involves spending money.

question

Implicit Cost

answer

A non-monetary opportunity cost.
- no salary for your own company → non-monetary opportunity cost = salary you COULD'VE gotten working at another job.

question

Economic Depreciation

answer

The difference between what you pay for capital (e.g. car) at the beginning of the year and what you would receive if you sell it at the end of the year.

question

Marginal Product of Labor

answer

The additional output a firm produces as a result of hiring one more worker.

question

Law of Diminishing Returns

answer

Adding more of a variable input (e.g. labor) to same amount of fixed input (ovens), will cause the marginal product of the variable input to decline.

question

Average Product of Labor Equation

answer

The total output produced DIVIDED by the quantity of workers.
= Q/L

question

Average Product of Labor Definition

answer

Average of marginal products of labor.

question

Average Total Cost Equation

answer

= TC/Q
(Total Cost / Output)

question

Marginal Cost Definition

answer

The change in a firm's total cost from producing one more unit.

question

Marginal Cost Equation

answer

= ΔTC/ΔQ

question

Average Fixed and Variable Cost Equation

answer

AFC = FC/Q
AVC = VC/Q

question

ATC =

answer

AFC + AVC

question

When MC < ATC...

answer

ATC ↓

question

When MC > ATC...

answer

ATC ↑

question

A long run average cost curve shows...

answer

The lowest cost at which a firm is able to produce a given quantity of output.

question

Diseconomies of Scale

answer

Long run average cost increases as we increase quantity.

question

Constant Returns to Scale

answer

Long run average cost remains unchanged as we increase quantity.

question

Economies of Scale

answer

Long run average cost decreases as we increase quantity.

question

Minimum Efficient Scale

answer

The lowest level of output at which all economies of scale are exhausted.

question

Why a firm experiences economies of scale?

answer

1. Firm's Technology
2. Workers become more specialized
3. Able to purchase inputs at lower prices
4. Able to borrow money at a lower interest rate

question

Why a firm experiences diseconomies of scale?

answer

The firm gets too large to be managed effectively.

question

Market Structure

answer

How firms interact with buyers to sell their output.

question

Perfect Competition

answer

1. Many Firms
2. Identical Products
3. Very easy to enter
(wheat / poultry farming)

question

Monopolistic Competition

answer

1. Many Firms
2. Differentiated Products
3. Very easy to enter
(restaurants / clothing)

question

Oliglopoly

answer

1. Few Firms
2. Identical OR Different Products
3. NOT easy to enter
(manufacturing / cars)

question

Monopoly

answer

1. ONE firm
2. Unique Products
3. Entry Blocked
(USPS / First Class. Providing Tap Water)

question

In a perfectly competitive market the firm faces a ___________________ demand.

answer

HORIZONTAL

question

Why is the demand horizontal in a perfectly competitive market?

answer

- There are many firms
- Product is identical
→ Firm can NOT influence the price (PRICE TAKERS!!!!)

question

Profit Equation

answer

= Total Revenue - Total Cost
= TR - TC

question

Average Revenue Equation

answer

= TR / Q = (P x Q) / Q = P

question

Marginal Revenue Definition

answer

Additional revenue from selling one more unit.

question

Marginal Revenue Equation

answer

= ΔΤR / ΔQ = P

question

In a perfectly competitive market price (P) is equal to....

answer

- MR
- Average Revenue

SO

P = MR = Average Revenue

question

Rules for Profit Maximization

answer

1. Where the difference between TR and TC is largest (POSITIVE)
2. Where MC = MR
(MR = P → P = MC)

question

Equation for Profit Maximization

answer

Profit = (P - ATC) x Q

question

When P > ATC....

answer

Profits are positive

question

When P = ATC...

answer

Profits are ZERO

question

When P < ATC...

answer

Profits are NEGATIVE

question

Shut Down Condition for Perfect Competition

answer

P < AVC → Firms will NOT produce output

question

The firm's MC curve in perfect competition is its _________ curve ONLY for prices ____ or _________ AVC.

answer

1. Supply
2. At
3. Above

question

Break Even

answer

Zero Economic Profit

question

Long Run Competitive Equilibrium

answer

Firms entering/exiting the market until the firms which remain in the market break even.

question

Competition in the long run drives prices to.....

answer

P = Minimum Long Run Average Total Cost

question

Constant Cost Industry

answer

- Indicated by a horizontal supply line

question

Increasing Cost Industry

answer

- Some factors of production cannot be replicated
- Upward Sloping
e.g. wine → ↑P of land → ↑Cost

question

Decreasing Cost Industry

answer

- One firm can generate benefits for other firms
- Downward Sloping
e.g. nike shoes → synthetic rubber

question

Productive Efficiency

answer

The good is produced at the lowest possible cost.

question

Allocative Efficiency

answer

Production is in accordance w/ consumer preferences
MB = MC

question

Perfect Competition is BOTH ______________ & ________________ Efficient

answer

1. Productive
- P = MC, P = Minimum ATC
2. Allocative
- MB = MC

question

Price Effect

answer

Loss revenue due to lower prices.

question

Output Effect

answer

Gain in revenue from increase in output.

question

Each firm that has the ability to affect the price will have a __ _________ below its demand curve.

answer

- MR Curve

question

How a Monopolistic Firm Maximizes Profits in the Short Run

answer

1. MR = MC
(go up to ATC and D)

question

More firms entering in the monopolistic market =

answer

Short run positive economics profits

question

In the Long Run in a Monopolistic Market...

answer

1. Demand curve will shift to the left
2. Become MORE elastic → consumers have more substitutes

question

A Monopolistic Competition is NOT ________ & ________ Efficient

answer

1. Productive
- P DOES NOT EQUAL Min ATC
- MB (P) DOES NOT EQUAL MC

question

Excess Capacity

answer

If the firm increases its output, the firm could produce at a lower ATC.

question

Consumers benefit from...

answer

Product Differentiation

question

What makes a firm successful?

answer

1. Differentiate its product
2. Ability to produce at a lower average cost

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Microeconomics Midterm 3 (11, 12, 13)

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